For a lot of people it still isn’t clear what the difference is between normal interest and compound interest. So to clarify things: What is compound interest?
The really simple explanation for this is that compound interest is calculated on the initial deposit + the profit you made on your interest. You actually invest your interest (let’s call it profit) in your investment again.
Doesn’t that mean that all interest is actually compound interest? Yes, if you keep your profits you made in the same account it is compounding the following periods.
Let’s make this example of what compound interest is visible with some numbers. Let’s say you invested $10.000 in our Easy Hedge Fund Strategy 1. The average return of this strategy is about 8% per month. This means that after 1 month you will have made $800 profit. Your new balance is now $10.800. At the end of the month you mad again 8%, but now the 8% return is not $800 but $864 because you invested your profits as well.
This is the difference between a normal interest of 8% and a compound interest of 8%. Because you reinvest your profits you will make bigger profits the next month. In the table below you can see the same example as taken above. An investment of $10.000 with a 8% per month with a normal interest (red) and compound interest (gold) line. The example is for a two year long investment.
Interest vs. Compound interest
Difference between normal interest and compound interest based on a monthly return of 8%.
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Power of compounding
So why should I choose for compound interest over normal interest? Well compound can make you a lot more than normal interest, Albert Einstein even called it the “Eight wonder of the world”. A lot of people underestimate the actual returns of long term compound interest.
So is compound interest always the best way? Of course there are also some cons on compound interest. One of the biggest is that you are always reinvesting your profits. So if you make some losses you have the change to also lose your profits or even your actual investment.
I want to compound
If you are trading or investing yourself there are big risks involved. This is why we always advice to let an expert invest or trade your funds. Easy Hedge Fund is the accessible hedge fund for all. With our low minimum we make hedge funds available for the general public.